Countries and Regions

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Country Strategy and Program Update 2002-2004: Pakistan

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I. Development Situation

A. Recent Political and Social Developments

1. Pakistan remains under the G7 partial sanction regime following its nuclear testing in May, 1998 and for not yet being a signatory to the Comprehensive Test Ban Treaty. The present Government took office on 12 October 1999 with General Pervez Musharraf assuming the office of Chief Executive of Pakistan. The Supreme Court has validated the Government of General Musharraf until 12 October 2002 while ruling that democracy must be restored by then. The Government is taking steps to restore democracy within this time frame. In June 2001, the Chief Executive also assumed the position of President.

2. Pakistan’s relations with India, though strained over the Kashmir dispute, have eased somewhat following the Pakistan President and Chief Executive’s acceptance of the Indian Prime Minister’s invitation to a summit in New Delhi. It is significant that no precondition for the talks have been set by either side. The Kashmir issue is likely to feature prominently in the talks. While international sanctions against Afghanistan remain in force, the Government is under pressure to respond to the unfolding human tragedy in Afghanistan and the steady streams of refugees flowing into Pakistan-the result of years of conflicts, and compounded in recent years by severe drought affecting large areas of Afghanistan.

3. The Government is proceeding rapidly with its plans for the decentralization and devolution of power to the local governments by 15 August 2001. The Local Government 2000 Plan, announced in March 2000 envisages a three-tier local level government system that will institute “people-centered rights and responsibility-based, and service-oriented” government structures. District level elections have been held in phases and are scheduled to be completed by 30 June 2001, and the local governments will start functioning from 15 August 2001.

B. Economic Assessment and Outlook

4. Pakistan’s economy remains in a state of crisis. Successive years of fiscal and external deficits have resulted in accumulation of large domestic and external debts. Public debt (both domestic and external) is estimated at 92 percent of gross domestic product (GDP) and about 610 percent of fiscal revenue in fiscal year (FY)2000. The FY2001 interest payments on public debt are forecast at 40 percent of total current expenditures in FY2001. As of 31 October 2000, Pakistan’s total outstanding external debt was estimated at $32 billion, and the ratio of external debt and foreign exchange obligations to foreign exchange earnings stood at over 300 percent. Even after debt rescheduling, the external debt service ratio was almost 30 percent in FY2000. In this context, Pakistan is implementing a far-reaching macroeconomic stabilization and restructuring program to deal with the economic crisis. Tight fiscal policy complemented by tight monetary policy is the cornerstone of the program. Pakistan’s economic indicators are given in Appendix 1.

5. The tight fiscal and monetary stance will mean slow initial growth but structural reforms should enhance growth over the medium term. The lack of fiscal space will constrain public investment, while weak investor confidence will constrain private investment. Furthermore, severe drought, high oil prices, and deterioration in the terms of trade had a strong negative impact on economic growth in FY2001. The growth forecast for FY2001 has been reduced to 2.6 percent from 3.9 percent in FY2000. The severe drought is forecast to reduce agricultural GDP by 2.5 percent in FY2001.

6. Based on positive assessment of the International Monetary Fund (IMF) standby arrangement (SBA), IMF is expected to initiate discussions on the Poverty Reduction and Growth Facility (PRGF) with the Government in August 2001. However the path to economic recovery will be a slow and difficult one. If Pakistan is to successfully reduce the fiscal deficit, meet the demands of debt servicing, and revive economic growth, it will need to generate additional resources. For that, the Government has to aggressively pursue structural reforms to overhaul the inefficient tax system, strengthen the banking sector, and privatize public companies. In addition, it must improve governance, including public expenditure management, to make more efficient use of public funds, improve effectiveness of public sector spending on physical and social infrastructure, and successfully address the problem of rising poverty in the country.

C. Implications for the Country Strategy and Program

7. Pakistan’s economic situation will remain weak over 2002-2004. During this period the key challenges facing the Government include restoring economic growth-constrained further by a drought-affected agriculture sector, managing the large debt burden, promoting domestic and foreign investors’ confidence, increasing exports to generate foreign exchange, and maintaining a level of social development spending to stem the deteriorating social indicators. Faced with such a daunting task the Government has accelerated its reform programs (ranging from agriculture sector liberalization to privatization of state-owned enterprises [SOEs] and banks) but much more remains to be done. The Government has prepared a strategy that specifies a wide-ranging and fundamental reform program and was presented at the Pakistan Development Forum (PDF) and the High Level Forum on Poverty Reduction. The Government’s serious commitment to reforms provides a unique opportunity for Asian Development Bank (ADB) and the other major funding agencies to support long overdue reforms. The Government’s reform program underpins ADB’s Country Strategy and Program (CSP).

8. The previous country operational strategy for Pakistan was prepared in 1995. Following political and economic developments since the nuclear tests conducted by the country in May 1998, ADB had to prepare an interim country operational framework in 1999. This has guided ADB’s operations since then. A full CSP is currently being prepared and is expected to be discussed by ADB’s Board of Directors in November 2001. This CSP update reflects ADB’s assessments so far but is subject to changes to be reflected in the full CSP. Following approval of this CSP update, a poverty reduction partnership agreement reflecting key priorities of the CSP will be signed with the Government by September 2001.

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